The Justice Department has called on the Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission to make some of their rules dealing with over-the-counter derivatives more stringent, arguing that the rules don’t go far enough to keep groups of major market players from banding together to control derivatives exchanges.
In separate comment papers sent to each agency today, Christine Varney, who heads the Justice Department’s Antitrust Division, says that DOJ supports the rules proposed by the SEC and the CFTC to limit to 20% the amount that individual derivatives dealers can own of security-based swap execution facilities and national securities exchanges.
But Varney goes on to say that the proposed rules don’t do enough to limit the amount that a small group of entities can own in aggregate. She wrote that it would be possible for as few as three entities to control a majority of the SEF or exchange and for as few as five to own them outright.
In both comment papers, Varney compares that possibility to three or five of the nation’s largest airlines controlling all landing rights at every U.S. airport. “The big carriers could use this control to disadvantage smaller carriers by restricting landing rights or raising their rivals’ costs to access the airports.”
In the case of SEFs and exchanges, Varney wrote, “[M]ajor dealers might use their control of a SEF or Exchange to exclude rivals, limit pre-and post-trade transparency, decline to trade certain contracts to disadvantage rivals, or try to evade exchange-trading requirements. In the Department's view, limiting both individual ownership shares and the aggregate shares held by major dealers would be the most effective structural approach to protecting competition in the derivatives markets.”
Varney recommended that both the SEC and the CFTC include caps on the aggregate amount of an SEF or exchange that can be owned.
In the comment paper sent to the SEC, Varney wrote that the Justice Department supports the proposed rule requiring that at least 50% of the members of a SEF/exchange’s board of directors and executive and membership committees be independent. Varney wrote that DOJ also supports the proposed SEC rule requiring that 100% of a SEF or exchange’s nominating and regulatory oversight committees be independent.
In the case of the governance rules proposed by the CFTC, Varney wrote that the proposed rules are “modest” at best. Under the CFTC’s proposed rule, while regulatory committees must be 100% independent, boards of directors and executive and membership committees have to be only 35% independent.
“Under this arrangement, enumerated entities could both control a [designed contract market or swap execution facility] voting equity, and through a majority presence on the board, its management decisions,” Varney wrote.